New York's Estate Tax Overhaul

New York State announced significant changes to the 2014+ estate tax system as a result of the 2014-2015 executive budget. Since nothing gets people riled up quite as much as having to cough up extra tax money AFTER WE DIE, the news is pretty good if your total assets are less than about $2 million on your expiration date.

While we are not specifically estate tax planners, and highly recommend involving an experienced attorney, I think it is important for clients to have an understanding of how their wealth might be taxed going forward for planning purposes. As always, we strongly recommend discussing your personal tax situation with a professional before making any decisions or choosing any course of action. Effective state tax planning is one of the more difficult parts of a comprehensive financial plan, so, don't try this at home.

First, for estate tax purposes, any taxable gifts made within three years of the date of death are included in the gross estate. This is a significant change, as lifetimes gifts after January 1, 2000, were not previously included in the state estate tax calculation. However, it does appear as if this three-year pullback expires on January 1st, 2019.

Next is a five-year increase of the estate tax exemption, with the goal of bringing it inline with the Federal estate tax exemption amount. Here's a rundown based on the date of death - note that the estate tax exemption prior to April 1st, 2014 of this year was only $1 million:

Date of Death On or AfterEstate Tax Exemption
April 1, 2014$2,062,500
April 1, 2015$3,125,000
April 1, 2016$4,187,500
April 1, 2017$5,250,000
January 1, 2019Federal Exemption

For estates that are required to file, that are up to the annual exclusion amount, a credit equal to the tax calculated is allowed.

However, for estates valued between 100% and 105% of the tax exemption (so, up to $2,165,625 for April 2014 - March 2015), the credit begins to be reduced and phased out. For example, a taxable estate of $2,100,000 would be subject to an estate tax of $106,800 (5%), but would receive a credit of $57,492, for a total estate tax due of $49,308 (see this memorandum for details). At 105% of the exclusion limit, no credit is allowed.

The result is a "cliff" estate tax - if your estate is valued at an amount 105% higher than the annual exclusion, not only are you required to file, but your entire estate is subject to the NY tax at a maximum rate of 16%. The New York Society of CPAs isn't happy with this situation, and is lobbying to have it changed.

The Generation Skipping Tax (GST) has been completely repealed for New York State tax purposes. Note, however, that the federal GST remains in effect.

Certain elections made on the federal estate tax return are binding on your NEw York estate tax return. The most common example would be an alternative valuation election, or a separate qualified terminable interest property (QTIP) election.

Lastly, portability between spouses, which is permitted in the federal estate tax regime, is prohibited for New York State estate tax purposes.

Bottom line: if you think that you may have an estate tax liability upon death, you want to discuss this matter with your financial planner - us - and your estate planner soon. By the time you are subject to these taxes, it is obviously too late to do anything about them.